Final answer:
Operating costs are the expenses a business incurs to maintain day-to-day operations, including explicit costs like wages and rent, and implicit costs, which are opportunity costs such as forgoing a salary to work in the business.
Step-by-step explanation:
Operating costs are the money spent to run a business. These expenditures are essential for the day-to-day functioning of a business and can include a variety of expenses such as wages, rent, utilities, and raw materials. They are distinct from the money owners invest directly into a business or money borrowed from lenders. We can break down operating costs into two categories: explicit and implicit costs.
Explicit costs are out-of-pocket expenses for actual payments made by a business, like salaries or rent. On the other hand, implicit costs represent the opportunity cost of using resources the firm owns, such as an owner's time or the use of property. These implicit costs include things like forgoing a salary to work in the business or using personal space for company operations. Depreciation of goods and equipment is also an implicit cost.
The distinction between these costs is essential when calculating economic and accounting profits. While accounting profit considers explicit costs, economic profit includes both explicit and implicit costs.